why checking correlation in square series?

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Yoshiko Kawashima
Yoshiko Kawashima on 6 Dec 2011
Why MATLAB product help (Econometric tools-Getting started-Time series modelling-GARCH models) calculates the correlation in both return series and the square of the return series. What is the reason for investigating the correlation in square series?

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Answers (1)

Wayne King
Wayne King on 6 Dec 2011
I'm guessing because correlation in the squared returns indicates correlation in the process variance. And that would indicate the possibility that the process is a good candidate for GARCH modeling.

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